June 23, 2025 • 22 mins
When empires face their greatest test, they need leaders willing to be hated for doing what's right.
In 1979, America stood at the crossroads every dying empire faces: destroy the economy to save the currency, or destroy the currency to save the economy. Nixon had already chosen poorly in 1971. By 1979, 13% inflation was bleeding American credibility worldwide.
Enter Paul Volcker—6'7" of unelected, unaccountable monetary discipline.
In this episode, we explore how one man's willingness to inflict maximum pain on the present preserved the American empire for another generation. From Carter's "malaise" to the Saturday Night Massacre that sent Fed funds to 20%, this is the story of leadership when democracy fails.
What You'll Learn:
- Why Nixon really closed the gold window (hint: Vietnam + welfare state)
- How Volcker became America's monetary dictator—and why it worked
- The ancient Roman concept of emergency leadership that saved republics
- The "Volcker Test" for your investment portfolio
- Why we probably won't get another Volcker (and what that means for your wealth)
From wooden planks mailed in protest to the longest peacetime expansion in history—this is empire preservation in real time.
Perfect for: Real estate investors, students of monetary history, and anyone wondering if democracies can still make hard choices.
Key Question: Do empires need philosopher-kings to survive? And what happens when they can't find them?
Resources Mentioned:
- Charles de Gaulle's "exorbitant privilege" critique
- Carter's July 1979 "malaise" speech
- Vietnam War financing and the gold standard
- Roman concept of emergency dictators
#TimelessInvestor #PaulVolcker #MonetaryPolicy #EmpireHistory #RealEstateInvesting #FederalReserve #InflationHistory
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Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
Welcome back to the Timeless Investor Show.
I'm Ari Van Gemeren, real estatefund manager, student of
history, and your host today.
There's a moment in everyempire's life when someone has
to make the hardest choice ineconomics, destroy the economy
to save the currency, or destroythe currency to save the
economy.
(00:20):
In 1979, America faced thatexact choice.
And one man, Paul Volcker, choseto inflict maximum pain on the
present to preserve the future.
What happened next wasn't justan example of monetary policy.
It was a premier amazing exampleof empire preservation.
(00:42):
And the lessons for today'sinvestors are not what you will
think.
Let me take you back to the1970s.
America was sick, not visiblydying like Rome in its final
years, or obviously bankruptlike Weimar Germany, but sick in
that deeper way that empires getwhen they start believing their
(01:02):
own lies about their money.
Jimmy Carter could feel it.
In July 1979, he gave whatbecame known as the malaise
speech, though he never usedthat word.
He talked about a crisis ofconfidence.
It was striking at the veryheart and soul and spirit of our
national will.
Carter was right about thediagnosis.
America had lost faith in itsinstitutions, its currency, its
(01:26):
future.
But he was wrong about the cure.
All of this started in 1971 whenNixon closed the gold window.
SPEAKER_01 (01:37):
Accordingly, I have directed the Secretary of the
Treasury to take the actionnecessary to defend the dollar
against the speculators.
I have directed SecretaryConnolly to suspend temporarily
the convertibility of the dollarinto gold or other reserve
assets, except in amounts andconditions determined to be in
the interest of monetarystability and in the best
(02:00):
interest of the United States.
SPEAKER_00 (02:03):
We're going off gold temporarily, he said.
54 years later, we're stilltemporary.
But that decision unleashedsomething that has been building
for decades, the great Americaninflation.
Here's what Many people,including myself at some points,
don't really understand.
Nixon didn't close the goldwindow because he wanted to.
(02:26):
He closed it because America wasbleeding gold to finance the
Vietnam War and the GreatSociety programs at the same
time.
We were trying to fight a warabroad and build a welfare state
at home, and we were paying forit both by printing money.
The Europeans, especially theFrench, figured this out.
They started demanding gold fortheir dollars.
(02:48):
Charles de Gaulle called itAmerica's exorbitant privilege,
our ability to print the world'sreserve currency and export our
inflation to everyone else.
So by 1971, foreign governmentswere draining Fort Knox faster
than we could pretend that itwasn't happening or that
everything was going to be fine.
So Nixon had to slam the goldwindow shut.
(03:11):
It was supposed to be temporary.
It became temporary.
So by 1979, inflation wasrunning at over 13% annually.
Now think about that for amoment.
Your money was losing more thanone-tenth of its value every
single year.
If you saved a dollar, it wasworth 87 cents 12 months later.
(03:33):
Without any risk, without anyinvestment gone wrong, just by
existing in the monetaryecosystem that we live in.
But here's what's reallyimportant to understand.
This wasn't just abouteconomics.
This was about empire.
The dollar's credibility as theworld's reserve currency was
collapsing.
(03:53):
OPEC was pricing oil in Germanmarks.
Foreign central banks weredumping dollars for gold and
other currencies.
The same pattern we've studiedin previous episodes were
playing out in real time inAmerica.
Remember Rome's worthlessdenarius started as solid
silver, ended up as worthlessbase metal.
The Ottoman Empire's currencieswent from carefully inspected
(04:16):
silver to debased copper alloy.
America in 1979 was walking thesame path.
We just didn't realize it at thetime.
The political establishment wasdoing what political
establishments always do.
They were looking for easysolutions.
More spending, more stimulus,more money printing.
(04:38):
Because that's what democracieswill do When the going gets
hard, they will choose the paththat feels good today and defer
the pain to tomorrow.
And that is a truism ofdemocracy.
In my humble opinion,politicians will almost always
make that calculation becausethey're not thinking long term.
They are thinking about gettingreelected in three years or four
(04:59):
years or two years.
And that's as far as their timehorizon lasts.
It's a big problem.
It's a huge issue withdemocracy.
But it's also true that empiresthat don't defer pain or that do
defer pain don't stay empiresfor long.
They fall apart.
(05:20):
So let's talk about Volcker.
So in August 1979, Jimmy Carterappointed a six foot seven
former treasury official namedPaul Volcker to chair the
Federal Reserve.
And Volcker understood somethingthat most economists and
politicians didn't.
Sometimes You have to destroythe village to save it.
(05:40):
So on October 6th, 1979, a datethat should be remembered
alongside Black Tuesday and theday Nixon closed the gold
window, Volcker announced whatmarkets later called Saturday
Night Massacre.
The Fed was going to stoptargeting interest rates and
(06:01):
start targeting money supplydirectly Translation, they were
going to jack up interest ratesas high as necessary to kill
inflation no matter what it didto the economy.
So within months, the federalfunds rate hit 20%.
20! Let me put that inperspective for you real estate
(06:22):
investors listening to this.
Mortgage rates hit 18%.
Credit card rates went to 25%.
Corporate borrowing stopped.
The pain was immediate.
And it was brutal.
Think about what we've just gonethrough with our increase.
And we went from, what, 1% to5%.
(06:43):
Imagine going from 5% to 20%.
Think about that.
Unemployment shot to 10.8%.
The highest since the GreatDepression.
Manufacturing collapsed.
The Rust Belt got way worse.
Farmers couldn't service theirdebt.
and they lost family land thathad been held for generations.
(07:03):
Small businesses died by thethousands.
Real estate crushed.
Construction stopped.
Sales stopped.
The entire industry went intohibernation because nobody could
afford an 18% mortgage.
Volcker became the most hatedman in America.
Protesters surrounded theFederal Reserve Building.
Homebuilders mailed him woodenplanks, two-by-fours of messages
(07:24):
telling him what he wasdestroying.
One Democratic congressmancalled for his impeachment.
But Ronald Reagan, who hadcampaigned on supporting
Volcker's policies, quietlysuggested maybe it was time to
ease up.
The pressure was enormous, butVolcker held firm.
Here's what a lot of people missabout the Volcker period.
(07:46):
It wasn't just about inflation.
It was about something deeper.
It was about whether America wasstill a serious country capable
of making hard choices.
Think about it this way.
Every empire that's collapsedhas faced and failed this exact
test.
Rome could have stopped debasingthe denarius, but it would have
(08:09):
meant cutting back on bread andcircuses.
The Ottoman Empire could havemaintained sound money, but it
would have meant losing somewars.
Britain could have maintainedthe gold standard, but it would
have meant accepting economicreality instead of financing
empire through debt.
They all chose the easy path,print money, debase currency,
defer the hard choices to thenext generation.
(08:31):
Volcker chose differently.
And in 1982, after this pain,something remarkable happened.
Inflation broke.
It fell from over 13% to under4% in less than two years.
The dollar strengtheneddramatically.
Foreign investors started buyingAmerican assets again.
(08:52):
The foundation was laid for whatwould become the longest
peacetime expansion in Americanhistory.
And here's the key insight forinvestors.
The cure was more painful thanthe disease, but it worked
because it was credible.
Markets believed that Volckerwould stay the course no matter
(09:13):
what.
And that credibility, thattrust, is what has maintained
American monetary hegemony foranother generation.
So what lessons can we We asreal estate investors and LPs
and people thinking about thistake from this story.
Or said differently, why am Itelling you this story?
(09:34):
Because understanding Volckerhelps you understand something
fundamental about how wealth isreally created and preserved.
In 81 and 82, when interestrates hit 20%, most real estate
investors got wiped out.
As you can imagine, we're havingwipeouts right now at a 6%
(09:55):
interest rate.
Can you imagine if it was 18%?
The leveraged players, the guysbetting on appreciation, the
developers who needed cheapmoney to make their projects
work, they all got crushed.
But some investors not onlysurvived, they thrived.
Who were they?
First, the cash flow focusedoperators.
If your building was generatingenough rent to cover expenses
(10:17):
and debt at reasonable leveragelevels, you could wait out the
storm.
Buildings that cash flow to 12%rates still cash flow to 18%
rates.
Second, the disciplined capitalallocators, the investors who
had kept powder dry, who hadn'tleveraged up in the easy money
years of the mid-70s.
When distressed properties hitthe market in 82 and 83, they
(10:41):
were the ones with capital todeploy.
Third, the long-term holders,the investors who understood
that real estate isfundamentally about providing
shelter, not about financialengineering.
And when the monetary smokecleared, people still needed
places to live and work.
You know who really cleaned upin the late 70s, early 80s too?
(11:02):
The Persian-Iranian diaspora.
Quick history lesson for youguys.
When the Shah of Iran was drivenout, and highly relevant given
what's happening in Iran rightnow, this is an important story,
Khamenei, was driven out, drovethe Shah out of Iran when the
Shah was overthrown in theIranian revolution.
(11:22):
He co-opted a pro-democracymovement of students to become
the Ayatollah, the SupremeLeader of Iran.
And the wealthy, theprogressive, the less religious,
and Jewish Iranians all fledIran en masse.
The timing is interesting.
There's a reason...
(11:42):
And those of you that don't knowthis, you're about to learn
something great, that we callLos Angeles Terangeles.
It is a huge minority ofTerangeles.
Los Angeles is Persian.
And they arrived in Los Angelesat the optimal moment, the
optimal moment, when Volcker hadjust raised rates.
People were defaulting, losingtheir buildings.
(12:03):
Buildings were trading atnothing.
They had the know-how.
They had some capital they hadbrought with them, and they were
able to acquire huge amounts ofLos Angeles, which is why today
we call it Tarantulas.
So all of this, this gives uswhat I call the Volcker test for
(12:24):
modern real estate investment.
It's not about surviving 20%rates.
I don't think anybody couldactually survive that.
But it is about asking, whatwould happen to your portfolio
if rates doubled from here?
If we went from What wouldhappen?
Most investors would still getcrushed, but some would survive
and even thrive.
(12:46):
What is the difference?
They're not betting on cheapmoney continuing forever.
Here's how I think you can goabout passing the quote-unquote
Volcker test.
First, cash flow discipline.
Buy assets to pay you ameaningful return from day one.
Don't speculate.
Don't speculate.
Don't bet on refinancing atlower rates.
(13:32):
Understand what level of riskthey're taking.
Financial engineering of returnswith debt is a very dangerous
game.
It works until it doesn't work.
And when it doesn't work, it's adisaster.
We are finding that out todaywith many buildings.
Third, own andsupply-constrained markets.
Own real estate where buildingis hard and demand is
(13:52):
structural.
When monetary conditionstighten, these markets will hold
value better because thefundamentals are strong.
The goal is isn't to survive theimpossible.
It's to build wealth thatdoesn't depend on everything
going perfectly.
So here's where this getsinteresting for today's
investors.
And I've been mentioning thismultiple times, but I kind of
(14:14):
want to finish on this note.
The setup we're facing now todayrhymes perfectly, pretty
perfectly with 1979.
We've had more than a decade ofessentially free money.
The Fed funds rate was at zerofor most of the period from 2008
to 2022.
Asset prices have been inflatedby cheap credit.
(14:36):
Government spending hasexploded.
We've been financing consumptionwith borrowed money and calling
it prosperity.
Does that sound familiar?
The difference is, and this isscary, the difference is that
this time the debt levels areway higher.
The political will for hardchoices appears much weaker.
(14:57):
And we don't have another PaulVolcker waiting in the wings.
But here's what I think mostinvestors are still missing.
We might not get another Volckerbecause we might not be able to
afford one.
The debt levels are so high nowthat 20% interest rates wouldn't
just cause a recession the waythey did under Volcker.
They would probably cause acomplete financial system
(15:19):
collapse, which means we'refacing a choice between two bad
options, inflate away the debtthrough currency debasement, I
bet we'll do whatever one alwaysdoes and we'll choose inflation,
which means you want to own realassets, not financial assets.
(15:40):
You want to own things that holdvalue and currencies weaken, not
things that are promises to payand weakening currencies.
So how do you position for this?
How do we build wealth that cansurvive either scenario?
whether we get another Volckeror we get continued monetary
debasement.
And I just want to be clear, Idon't think we're going to get
another Volcker.
(16:00):
And I don't think we have thepolitical appetite, nor the
will, nor the desire, nor do Ieven have the desire for them to
raise interest rates to 20%.
I think it seems like inflationis getting a little bit more
under control, but our debtlevel is out of control.
So let's think about this.
The Volcker test that I proposedisn't really about surviving 20%
rates.
It's about building portfoliosthat don't collapse when rates
(16:23):
move against you.
The main thing, the main thingthat will protect you, in my
humble opinion, is owninglong-term fixed rate debt where
it makes sense.
If you can lock in rates for 10to 30 years on cash flowing
properties, you're essentially,essentially shorting the dollar
(16:47):
at government exposure, right?
Think about this also when youthink about debt.
It's a really important point.
I'm not sure everyoneunderstands this point.
Fixed rate debt becomes lesspainful for you over time
because the currency with whichit's funded with is debased over
time.
(17:07):
It's good to be a recipient oflong-term debt in an
inflationary environment becauseyour interest payments don't
rise and the value of that debt.
Remember the example where wesaid 13% inflation and the next
year your money was worth 87% ofwhat it was before?
It's the same with your debt.
It's the same.
So if you have long-termfixed-rate debt and you have a
(17:29):
bet that the economy is going tocontinue to inflate away its
problems, taking long-termfixed-rate debt on real assets
is a genius move, is a powerfulmove, as long as you can lock it
in.
Lock it in.
So here is the deeper questionthat Volcker's story raises.
(17:51):
Do empires need philosopherkings to survive?
Do they need leaders willing tobe hated for doing what is
right?
Volcker was unelected andessentially unaccountable.
He imposed massive pain onmillions of Americans to
(18:12):
preserve the integrity of themonetary system.
From a democratic standpoint,that is quite troubling.
But from an empire preservationstandpoint, it isn't.
worked the ancient romansunderstood this they had a
concept called the dictator notin the modern sense but a
temporary leader appointedduring crisis with extraordinary
(18:37):
powers to make unpopulardecisions the idea was that
sometimes democracy is too slowand too accommodating to deal
with existential threats sovolcker was effectively
america's monetary dictator forabout four years, and he saved
the empire.
But can we count on findinganother Volcker when we need
(18:58):
one?
Can democratic systems make hardchoices when those choices
involve short-term pain forlong-term preservation?
I am not optimistic, which meanswe as investors need to plan for
a world where monetarydiscipline might not be imposed
from above We need to impose iton ourselves.
(19:20):
Here's what I want you to takeaway broadly from this episode.
Paul Volcker understood thedifference between saving the
system and saving the people init.
And in the end, he chose thesystem.
It sounds harsh, but think aboutit historically.
Every empire that's tried tosave everyone in the short term
has ended up destroying everyonein the long term.
(19:42):
Rome tried to keep the bread andcircuses going through currency
debasement.
It worked for a while.
But eventually the whole systemcollapsed and the dark ages
followed.
Volcker chose temporary pain toavoid permanent damage and it
worked.
As investors, we face the samechoice every day.
We can chase yield by taking onmore risk, more leverage, more
complexity.
(20:03):
We can bet on easy moneycontinuing forever.
We can prioritize today'sreturns over tomorrow's
security.
Or we can build and think likeVolcker.
Boring discipline.
focused on long-term credibilityover short-term performance.
The choice you make willdetermine whether you build
wealth the last generations orjust ride a bubble until it
(20:24):
pops.
One last thought.
I started this episode by sayingthat every empire faces the
choice between destroying theeconomy to save the currency or
destroying the currency to savethe economy.
Volcker chose to destroy theeconomy temporarily to save the
currency permanently, and itworked.
But what if We don't get anotherVolcker.
(20:45):
What if the next time we facethis choice, we choose
differently?
Then, as I said before, you willwant to own assets that
appreciate when currenciesdepreciate.
You want to own things thatcannot be printed.
You want to own real estate inplaces where people have to live
and work, regardless of whathappens to the dollar.
Because here's the thing aboutempire collapse.
It's not the end of the world.
(21:07):
People will still need shelter.
Commerce still happens.
Wealth still gets created andpreserved.
It just flows to differentassets and different people.
The question is, will you bepositioned to receive that flow
or will you be holding promisesthat become worthless when the
monetary music stops?
That's what I wanna leave youwith today.
(21:28):
Paul Volcker saved the Americanempire through monetary
discipline, but he was theexception, not the rule.
Most empires choose the easypath and face the inevitable
consequences.
As investors, We cannot controlmonetary policy, but we can
control our own discipline.
We can build portfolios thatdon't depend on easy money
forever.
We can choose boring assets thatwork in any monetary environment
(21:53):
over exciting trades that mightonly work today.
Think well, act wisely, buildsomething today.
Timeless.
If you enjoyed this episode,please share it with your
network and leave us a review onwhatever platform you're using.
It really helps the show grow.
And if you haven't already,subscribe to the Timeless
Investor newsletter on Substack,where we deep dive into these
(22:15):
themes with historical analysisand practical application.
The link is in the show notes.
I really appreciate you guysjoining me this week for this
deep dive on Paul Volcker and anincredible turning point moment
in American and monetaryhistory.
I look forward to seeing you allnext week thank you for joining
me have a great week.
Welcome back to the Timeless Investor Show.
I'm Ari Van Gemeren, real estatefund manager, student of
history, and your host today.
There's a moment in everyempire's life when someone has
to make the hardest choice ineconomics, destroy the economy
to save the currency, or destroythe currency to save the
economy.
(00:20):
In 1979, America faced thatexact choice.
And one man, Paul Volcker, choseto inflict maximum pain on the
present to preserve the future.
What happened next wasn't justan example of monetary policy.
It was a premier amazing exampleof empire preservation.
(00:42):
And the lessons for today'sinvestors are not what you will
think.
Let me take you back to the1970s.
America was sick, not visiblydying like Rome in its final
years, or obviously bankruptlike Weimar Germany, but sick in
that deeper way that empires getwhen they start believing their
(01:02):
own lies about their money.
Jimmy Carter could feel it.
In July 1979, he gave whatbecame known as the malaise
speech, though he never usedthat word.
He talked about a crisis ofconfidence.
It was striking at the veryheart and soul and spirit of our
national will.
Carter was right about thediagnosis.
America had lost faith in itsinstitutions, its currency, its
(01:26):
future.
But he was wrong about the cure.
All of this started in 1971 whenNixon closed the gold window.
SPEAKER_01 (01:37):
Accordingly, I have directed the Secretary of the
Treasury to take the actionnecessary to defend the dollar
against the speculators.
I have directed SecretaryConnolly to suspend temporarily
the convertibility of the dollarinto gold or other reserve
assets, except in amounts andconditions determined to be in
the interest of monetarystability and in the best
(02:00):
interest of the United States.
SPEAKER_00 (02:03):
We're going off gold temporarily, he said.
54 years later, we're stilltemporary.
But that decision unleashedsomething that has been building
for decades, the great Americaninflation.
Here's what Many people,including myself at some points,
don't really understand.
Nixon didn't close the goldwindow because he wanted to.
(02:26):
He closed it because America wasbleeding gold to finance the
Vietnam War and the GreatSociety programs at the same
time.
We were trying to fight a warabroad and build a welfare state
at home, and we were paying forit both by printing money.
The Europeans, especially theFrench, figured this out.
They started demanding gold fortheir dollars.
(02:48):
Charles de Gaulle called itAmerica's exorbitant privilege,
our ability to print the world'sreserve currency and export our
inflation to everyone else.
So by 1971, foreign governmentswere draining Fort Knox faster
than we could pretend that itwasn't happening or that
everything was going to be fine.
So Nixon had to slam the goldwindow shut.
(03:11):
It was supposed to be temporary.
It became temporary.
So by 1979, inflation wasrunning at over 13% annually.
Now think about that for amoment.
Your money was losing more thanone-tenth of its value every
single year.
If you saved a dollar, it wasworth 87 cents 12 months later.
(03:33):
Without any risk, without anyinvestment gone wrong, just by
existing in the monetaryecosystem that we live in.
But here's what's reallyimportant to understand.
This wasn't just abouteconomics.
This was about empire.
The dollar's credibility as theworld's reserve currency was
collapsing.
(03:53):
OPEC was pricing oil in Germanmarks.
Foreign central banks weredumping dollars for gold and
other currencies.
The same pattern we've studiedin previous episodes were
playing out in real time inAmerica.
Remember Rome's worthlessdenarius started as solid
silver, ended up as worthlessbase metal.
The Ottoman Empire's currencieswent from carefully inspected
(04:16):
silver to debased copper alloy.
America in 1979 was walking thesame path.
We just didn't realize it at thetime.
The political establishment wasdoing what political
establishments always do.
They were looking for easysolutions.
More spending, more stimulus,more money printing.
(04:38):
Because that's what democracieswill do When the going gets
hard, they will choose the paththat feels good today and defer
the pain to tomorrow.
And that is a truism ofdemocracy.
In my humble opinion,politicians will almost always
make that calculation becausethey're not thinking long term.
They are thinking about gettingreelected in three years or four
(04:59):
years or two years.
And that's as far as their timehorizon lasts.
It's a big problem.
It's a huge issue withdemocracy.
But it's also true that empiresthat don't defer pain or that do
defer pain don't stay empiresfor long.
They fall apart.
(05:20):
So let's talk about Volcker.
So in August 1979, Jimmy Carterappointed a six foot seven
former treasury official namedPaul Volcker to chair the
Federal Reserve.
And Volcker understood somethingthat most economists and
politicians didn't.
Sometimes You have to destroythe village to save it.
(05:40):
So on October 6th, 1979, a datethat should be remembered
alongside Black Tuesday and theday Nixon closed the gold
window, Volcker announced whatmarkets later called Saturday
Night Massacre.
The Fed was going to stoptargeting interest rates and
(06:01):
start targeting money supplydirectly Translation, they were
going to jack up interest ratesas high as necessary to kill
inflation no matter what it didto the economy.
So within months, the federalfunds rate hit 20%.
20! Let me put that inperspective for you real estate
(06:22):
investors listening to this.
Mortgage rates hit 18%.
Credit card rates went to 25%.
Corporate borrowing stopped.
The pain was immediate.
And it was brutal.
Think about what we've just gonethrough with our increase.
And we went from, what, 1% to5%.
(06:43):
Imagine going from 5% to 20%.
Think about that.
Unemployment shot to 10.8%.
The highest since the GreatDepression.
Manufacturing collapsed.
The Rust Belt got way worse.
Farmers couldn't service theirdebt.
and they lost family land thathad been held for generations.
(07:03):
Small businesses died by thethousands.
Real estate crushed.
Construction stopped.
Sales stopped.
The entire industry went intohibernation because nobody could
afford an 18% mortgage.
Volcker became the most hatedman in America.
Protesters surrounded theFederal Reserve Building.
Homebuilders mailed him woodenplanks, two-by-fours of messages
(07:24):
telling him what he wasdestroying.
One Democratic congressmancalled for his impeachment.
But Ronald Reagan, who hadcampaigned on supporting
Volcker's policies, quietlysuggested maybe it was time to
ease up.
The pressure was enormous, butVolcker held firm.
Here's what a lot of people missabout the Volcker period.
(07:46):
It wasn't just about inflation.
It was about something deeper.
It was about whether America wasstill a serious country capable
of making hard choices.
Think about it this way.
Every empire that's collapsedhas faced and failed this exact
test.
Rome could have stopped debasingthe denarius, but it would have
(08:09):
meant cutting back on bread andcircuses.
The Ottoman Empire could havemaintained sound money, but it
would have meant losing somewars.
Britain could have maintainedthe gold standard, but it would
have meant accepting economicreality instead of financing
empire through debt.
They all chose the easy path,print money, debase currency,
defer the hard choices to thenext generation.
(08:31):
Volcker chose differently.
And in 1982, after this pain,something remarkable happened.
Inflation broke.
It fell from over 13% to under4% in less than two years.
The dollar strengtheneddramatically.
Foreign investors started buyingAmerican assets again.
(08:52):
The foundation was laid for whatwould become the longest
peacetime expansion in Americanhistory.
And here's the key insight forinvestors.
The cure was more painful thanthe disease, but it worked
because it was credible.
Markets believed that Volckerwould stay the course no matter
(09:13):
what.
And that credibility, thattrust, is what has maintained
American monetary hegemony foranother generation.
So what lessons can we We asreal estate investors and LPs
and people thinking about thistake from this story.
Or said differently, why am Itelling you this story?
(09:34):
Because understanding Volckerhelps you understand something
fundamental about how wealth isreally created and preserved.
In 81 and 82, when interestrates hit 20%, most real estate
investors got wiped out.
As you can imagine, we're havingwipeouts right now at a 6%
(09:55):
interest rate.
Can you imagine if it was 18%?
The leveraged players, the guysbetting on appreciation, the
developers who needed cheapmoney to make their projects
work, they all got crushed.
But some investors not onlysurvived, they thrived.
Who were they?
First, the cash flow focusedoperators.
If your building was generatingenough rent to cover expenses
(10:17):
and debt at reasonable leveragelevels, you could wait out the
storm.
Buildings that cash flow to 12%rates still cash flow to 18%
rates.
Second, the disciplined capitalallocators, the investors who
had kept powder dry, who hadn'tleveraged up in the easy money
years of the mid-70s.
When distressed properties hitthe market in 82 and 83, they
(10:41):
were the ones with capital todeploy.
Third, the long-term holders,the investors who understood
that real estate isfundamentally about providing
shelter, not about financialengineering.
And when the monetary smokecleared, people still needed
places to live and work.
You know who really cleaned upin the late 70s, early 80s too?
(11:02):
The Persian-Iranian diaspora.
Quick history lesson for youguys.
When the Shah of Iran was drivenout, and highly relevant given
what's happening in Iran rightnow, this is an important story,
Khamenei, was driven out, drovethe Shah out of Iran when the
Shah was overthrown in theIranian revolution.
(11:22):
He co-opted a pro-democracymovement of students to become
the Ayatollah, the SupremeLeader of Iran.
And the wealthy, theprogressive, the less religious,
and Jewish Iranians all fledIran en masse.
The timing is interesting.
There's a reason...
(11:42):
And those of you that don't knowthis, you're about to learn
something great, that we callLos Angeles Terangeles.
It is a huge minority ofTerangeles.
Los Angeles is Persian.
And they arrived in Los Angelesat the optimal moment, the
optimal moment, when Volcker hadjust raised rates.
People were defaulting, losingtheir buildings.
(12:03):
Buildings were trading atnothing.
They had the know-how.
They had some capital they hadbrought with them, and they were
able to acquire huge amounts ofLos Angeles, which is why today
we call it Tarantulas.
So all of this, this gives uswhat I call the Volcker test for
(12:24):
modern real estate investment.
It's not about surviving 20%rates.
I don't think anybody couldactually survive that.
But it is about asking, whatwould happen to your portfolio
if rates doubled from here?
If we went from What wouldhappen?
Most investors would still getcrushed, but some would survive
and even thrive.
(12:46):
What is the difference?
They're not betting on cheapmoney continuing forever.
Here's how I think you can goabout passing the quote-unquote
Volcker test.
First, cash flow discipline.
Buy assets to pay you ameaningful return from day one.
Don't speculate.
Don't speculate.
Don't bet on refinancing atlower rates.
(13:32):
Understand what level of riskthey're taking.
Financial engineering of returnswith debt is a very dangerous
game.
It works until it doesn't work.
And when it doesn't work, it's adisaster.
We are finding that out todaywith many buildings.
Third, own andsupply-constrained markets.
Own real estate where buildingis hard and demand is
(13:52):
structural.
When monetary conditionstighten, these markets will hold
value better because thefundamentals are strong.
The goal is isn't to survive theimpossible.
It's to build wealth thatdoesn't depend on everything
going perfectly.
So here's where this getsinteresting for today's
investors.
And I've been mentioning thismultiple times, but I kind of
(14:14):
want to finish on this note.
The setup we're facing now todayrhymes perfectly, pretty
perfectly with 1979.
We've had more than a decade ofessentially free money.
The Fed funds rate was at zerofor most of the period from 2008
to 2022.
Asset prices have been inflatedby cheap credit.
(14:36):
Government spending hasexploded.
We've been financing consumptionwith borrowed money and calling
it prosperity.
Does that sound familiar?
The difference is, and this isscary, the difference is that
this time the debt levels areway higher.
The political will for hardchoices appears much weaker.
(14:57):
And we don't have another PaulVolcker waiting in the wings.
But here's what I think mostinvestors are still missing.
We might not get another Volckerbecause we might not be able to
afford one.
The debt levels are so high nowthat 20% interest rates wouldn't
just cause a recession the waythey did under Volcker.
They would probably cause acomplete financial system
(15:19):
collapse, which means we'refacing a choice between two bad
options, inflate away the debtthrough currency debasement, I
bet we'll do whatever one alwaysdoes and we'll choose inflation,
which means you want to own realassets, not financial assets.
(15:40):
You want to own things that holdvalue and currencies weaken, not
things that are promises to payand weakening currencies.
So how do you position for this?
How do we build wealth that cansurvive either scenario?
whether we get another Volckeror we get continued monetary
debasement.
And I just want to be clear, Idon't think we're going to get
another Volcker.
(16:00):
And I don't think we have thepolitical appetite, nor the
will, nor the desire, nor do Ieven have the desire for them to
raise interest rates to 20%.
I think it seems like inflationis getting a little bit more
under control, but our debtlevel is out of control.
So let's think about this.
The Volcker test that I proposedisn't really about surviving 20%
rates.
It's about building portfoliosthat don't collapse when rates
(16:23):
move against you.
The main thing, the main thingthat will protect you, in my
humble opinion, is owninglong-term fixed rate debt where
it makes sense.
If you can lock in rates for 10to 30 years on cash flowing
properties, you're essentially,essentially shorting the dollar
(16:47):
at government exposure, right?
Think about this also when youthink about debt.
It's a really important point.
I'm not sure everyoneunderstands this point.
Fixed rate debt becomes lesspainful for you over time
because the currency with whichit's funded with is debased over
time.
(17:07):
It's good to be a recipient oflong-term debt in an
inflationary environment becauseyour interest payments don't
rise and the value of that debt.
Remember the example where wesaid 13% inflation and the next
year your money was worth 87% ofwhat it was before?
It's the same with your debt.
It's the same.
So if you have long-termfixed-rate debt and you have a
(17:29):
bet that the economy is going tocontinue to inflate away its
problems, taking long-termfixed-rate debt on real assets
is a genius move, is a powerfulmove, as long as you can lock it
in.
Lock it in.
So here is the deeper questionthat Volcker's story raises.
(17:51):
Do empires need philosopherkings to survive?
Do they need leaders willing tobe hated for doing what is
right?
Volcker was unelected andessentially unaccountable.
He imposed massive pain onmillions of Americans to
(18:12):
preserve the integrity of themonetary system.
From a democratic standpoint,that is quite troubling.
But from an empire preservationstandpoint, it isn't.
worked the ancient romansunderstood this they had a
concept called the dictator notin the modern sense but a
temporary leader appointedduring crisis with extraordinary
(18:37):
powers to make unpopulardecisions the idea was that
sometimes democracy is too slowand too accommodating to deal
with existential threats sovolcker was effectively
america's monetary dictator forabout four years, and he saved
the empire.
But can we count on findinganother Volcker when we need
(18:58):
one?
Can democratic systems make hardchoices when those choices
involve short-term pain forlong-term preservation?
I am not optimistic, which meanswe as investors need to plan for
a world where monetarydiscipline might not be imposed
from above We need to impose iton ourselves.
(19:20):
Here's what I want you to takeaway broadly from this episode.
Paul Volcker understood thedifference between saving the
system and saving the people init.
And in the end, he chose thesystem.
It sounds harsh, but think aboutit historically.
Every empire that's tried tosave everyone in the short term
has ended up destroying everyonein the long term.
(19:42):
Rome tried to keep the bread andcircuses going through currency
debasement.
It worked for a while.
But eventually the whole systemcollapsed and the dark ages
followed.
Volcker chose temporary pain toavoid permanent damage and it
worked.
As investors, we face the samechoice every day.
We can chase yield by taking onmore risk, more leverage, more
complexity.
(20:03):
We can bet on easy moneycontinuing forever.
We can prioritize today'sreturns over tomorrow's
security.
Or we can build and think likeVolcker.
Boring discipline.
focused on long-term credibilityover short-term performance.
The choice you make willdetermine whether you build
wealth the last generations orjust ride a bubble until it
(20:24):
pops.
One last thought.
I started this episode by sayingthat every empire faces the
choice between destroying theeconomy to save the currency or
destroying the currency to savethe economy.
Volcker chose to destroy theeconomy temporarily to save the
currency permanently, and itworked.
But what if We don't get anotherVolcker.
(20:45):
What if the next time we facethis choice, we choose
differently?
Then, as I said before, you willwant to own assets that
appreciate when currenciesdepreciate.
You want to own things thatcannot be printed.
You want to own real estate inplaces where people have to live
and work, regardless of whathappens to the dollar.
Because here's the thing aboutempire collapse.
It's not the end of the world.
(21:07):
People will still need shelter.
Commerce still happens.
Wealth still gets created andpreserved.
It just flows to differentassets and different people.
The question is, will you bepositioned to receive that flow
or will you be holding promisesthat become worthless when the
monetary music stops?
That's what I wanna leave youwith today.
(21:28):
Paul Volcker saved the Americanempire through monetary
discipline, but he was theexception, not the rule.
Most empires choose the easypath and face the inevitable
consequences.
As investors, We cannot controlmonetary policy, but we can
control our own discipline.
We can build portfolios thatdon't depend on easy money
forever.
We can choose boring assets thatwork in any monetary environment
(21:53):
over exciting trades that mightonly work today.
Think well, act wisely, buildsomething today.
Timeless.
If you enjoyed this episode,please share it with your
network and leave us a review onwhatever platform you're using.
It really helps the show grow.
And if you haven't already,subscribe to the Timeless
Investor newsletter on Substack,where we deep dive into these
(22:15):
themes with historical analysisand practical application.
The link is in the show notes.
I really appreciate you guysjoining me this week for this
deep dive on Paul Volcker and anincredible turning point moment
in American and monetaryhistory.
I look forward to seeing you allnext week thank you for joining
me have a great week.
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